Forms of Economic Analysis: Micro vs. Macro

Micro and Macro-economics

The subject matter of economics has been divided into two parts Microeconomics and Macroeconomics. These terms were first coined and used by Ragnar Frisch and have now been adopted by the economists all over the world. Nowadays one can hardly come across a text book on modern economic analysis which does not divide its analysis into two parts, one dealing with microeconomics and the other with macroeconomics.

The term microeconomics is derived from the Greek word mikros meaning “small” and the term macroeconomics is derived from the Greek word makros meaning “largo.” Thus, microeconomies deals with the analysis of small individual units of the economy such as individual firms and small aggregates or groups of individual units such as various industries and markets.

On the other hand, macroeconomics concerns itself with the analysis of the economy as a whole and its large aggregates such as total national output and income, total employment, total consumption, aggregate investment. Thus, according to K E Boulding, “Microeconomics is the study of particular fums, particular households, individual prices, wages, Incomes, individual industries, particular commodities.”

About macroeconomics he remarles, “Macroeconomics deals not with individual quantities as such but with aggregates of these quantities, not with individual incomes but with the national Income; not with individual prices but with the price level; not with individual outputs but with the national output “.

  • MICROECONOMICS

As stated above, microeconomics studies the economic actions and behaviour of individual units and small groups of individual units. In microeconomic theory we discuss how the various cells of economic organism, that is, the various units of the economy such as thousands of consumers, thousands of producers or firms, thousands of workers and resource suppliers in the economy do their economic activities and reach their equilibrium states. In other words, in microeconomics we make a microscope study of the economy.

But it should be remembered that microeconomics does not study the economy in Its totality. Instead, in microeconomics we discuss equilibrium of innumerable units of the economy piecemeal and their interrelationship to each other.

” For instance, in microeconomic analysis we study the demand of an individual consumer for a good and from there go on to derive the market demand for the good (that is, demand of a group of individuals consuming a particular group).

Examples of Microeconomic variables: Demand of a commodity, Supply of a commodity, Income of a consumer, Price of the commodity etc.

Examples of Microeconomic theories/study: Law of demand, Law of supply, Determination of consumer equilibrium, Determination of producer equilibrium etc.

-> Importance of Micro Economics

I. Price Determination:

Micro economics helps in elucidation how the prices of diverse commodities are determined.  It also explicates how the prices of various aspects of production such as rent for land, wages for labour, interest for capital and profits for entrepreneur are decided in the commodity and factor market.

II. Working of a Free Market Economy:

Free market economy is the economy where the economic pronouncements regarding production of goods such as ‘What to produce, How much to produce, How to produce etc.’ are taken by private individuals. These verdicts are based on the inclination of the consumer or demand for the product. Micro economics theory helps in grasping the working of the free market economy.

III. International Trade & Public Finance:

Micro economics helps to elucidate many international trade facets like impacts of tariff, determination of exchange rates, advantages from international trade etc. It is also beneficial in public finance to analyse both, the occurrences as well as effect of a specific tax.

IV. Utilization of Resources:

Micro economics helps in elucidating how the scarce resources can be effectually and efficiently utilized by the producers in order to achieve highest output.

V. Model Building:

Micro economics helps in grasping various complex economic situations with its modest models. It has made an imperative contribution to the science of economics by the development of numerous terms, concepts, terminologies, tools of economic evaluation etc.

VI. Helps in Taking Business Decisions:

Micro economic theories are beneficial to businessmen for taking decisive business decisions. These decisions comprise the cost of production, values, maximum output, consumer’s preferences, demand and supply of the product etc.

VII. Useful to Government:

Micro economics is that subdivision of economics which is related with the study of economic behaviour of individual economic units. It is beneficial in building economic policies such as taxation policy, public expenditure policy, price policy etc.  These policies aid the government to reach its goal of efficient distribution of resources and promoting economic wellbeing of the society.

VIII. Basis of Welfare Economics:

Micro economics endorses economic and social welfare by making finest utilization of the resources, thereby evading wastage.

  • MACROECONOMICS

Macroeconomics is a Study of Aggregates. We now turn to explain the approach and content of macroeconomics. ‘As said above, word macro is derived from the Greek word ‘makros’ meaning large and therefore macroeconomics is concerned with the economic activity in the large.

Macroeconomic analyses the behaviour of the whole economic system in totality or entirety. In other words, macroeconomic studies the behaviour of the large aggregates such as total employment, the national product or income, the general price level of the economy. Therefore, macroeconomics is also known as aggregative economics. Macroeconomics analyses and establishes the functional relationship between these large aggregates. Thus Professor Boulding says, “Macroeconomics deals not with individual quantities as such but with the aggregates of these quantities; not with individual incomes but with the national income, not with individual prices but with the price level; not with individual output but with the national output.

Macroeconomics, then, is that part of the subject which deals with large aggregates and averages of the system rather than with particular items in it and attempts to define these aggregates in a useful manner and to examine their relationships. ” Professor Gardner Ackley makes the distinction between the two types more clear and specific when he writes, macroeconomics concerns itself with such variables as the aggregate volume of output in an economy, with the extent to which its resources are employed, with the size of the national income, with the general price level”. Microeconomics, on the other hand, deals with the division of total output among industries, products and firms and the allocation of resources among competing uses. It considers problems of income distribution. Its interest is in relative prices of particular goods and services.

Examples of Macroeconomic variables : Aggregate supply, Aggregate demand, National income, Total output etc.

Examples of Macroeconomic studies/theories : Determination of equilibrium level of income, Determination of foreign exchange rate, Determination of govt. budget etc.

-> Importance of macroeconomics

Macroeconomics is a vibrant concept that studies the whole nation and works for the welfare of the economy. It is beneficial for the timing of economic variations to prevent or be prepared for any financial crisis or any long – term adverse situations. The system of fiscal and monetary policies rest on entirely on the examination of the widely held macroeconomic situations in the nation. Macroeconomics mainly purposes to help the Government and the financial bodies to fix economic stability in the country. This course of economics gives a broader viewpoint of social or national issues. The ones who want to provide to the welfare of society need to study macroeconomics. It guarantees or keeps a check over the appropriate functioning of the country’s economy and real position. The analysis of macroeconomics concepts and issues helps the economists to understand the causes and possible explanations of such macro-level problems.  Dealing with numerous economic situations through the use of macro-economic data unlocks the door for development in the country.